Those of us who went through the savings and loan crisis and the rash of bank failures in the 1980s remember the devastating effect brokered deposits had in causing and driving up the cost of those collapses.
Despite the urging of the Federal Deposit Insurance Corp.’s then-Chairman Bill Isaac, Congress only addressed the issue after the fact, restricting brokered deposits through a new section of the Federal Deposit Insurance Act.
Since then, the FDIC has repeatedly studied brokered deposits, concluding that it is, in fact, correlated with a higher rate of bank failures as well as an increased cost of resolutions. That’s why it is disheartening to see the bank trade associations and even the FDIC now considering a repeal of that restriction in the FDI Act — the only law dealing directly with brokered deposits. Legislation was recently introduced in Congress to implement such a repeal.
While there have been significant changes in how banks gather deposits, the basic problems caused by brokered deposits remain. In 2011, Congress mandated that the FDIC published an extensive study on the issue, finding that as “brokered deposit levels increase, the probability that a bank will fail also increases.” Furthermore, the study also found that banks with higher levels of brokered deposits were also more costly the Deposit Insurance Fund in the event of failure.